Economic growth is good: it means you have more money in your wallet, more items in your closet, and so on. But measuring and explaining economic growth on a country-wide basis is more complicated than checking the amount of money in your bank account.
To understand economic growth, you need to know something about the concept of opportunity cost. This is the price you pay for choosing one option over another (for example, buying a car instead of a bicycle). Because every choice imposes an opportunity cost, the more options you have, the better. This is why people want economic growth: it reduces the sting of scarcity and allows them to have more of what they want.
There are three ways to generate economic growth: more capital, more labor, and better use of existing resources (or, as economists call it, higher productivity). Capital growth comes from investment in tangible assets like machinery or buildings, and intellectual property such as research and development. Labor growth comes from hiring new workers, or by increasing the efficiency with which existing workers perform their jobs. Both are important to sustainable economic growth.
But, as the McKinsey Global Institute points out, “In a world where population growth is slowing and there are fewer overall workers, improving productivity will be crucial to maintaining GDP growth rates. That is why it’s important to understand the sources of productivity acceleration.”